perpetuity

Perpetuity

A constant stream of identical cash flows with no end. The formula for determining the present value of a perpetuity is as follows:

Notes:

This is not as abstract a concept as you may think the British issued bonds, called consols, are a great example of a perpetuity. By purchasing a consol from the British government, the bondholder is entitled to receive annual interest payments forever. Although it may seem a bit illogical, an infinite series of cash flows can have a finite present value. Because of the time value of money, each payment is only a fraction of the last.

The concept of a perpetuity is used often in financial theory, such as the dividend discount model (DDM).

See also: Annuity, Dividend Discount Model, Maturity Date, Perpetual Bond, Present Value

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Perpetuity

A constant stream of identical cash flows without end, such as a British consol.

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perpetuity

A stream of payments that is expected to last indefinitely.